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Sebi lens on angels could lead to crowdfunding rules

The scrutiny of the functioning of angel networks by the Securities and Exchange Board of India (Sebi) could pave the way for crowd funding regulations.

Sebi has reportedly written to several angel networks in recent weeks, seeking details about their fund raising business and whether they operate within the contours of the securities market law.

Angel networks areakey link between the startups looking to raise money and the investors.

The capital markets regulator fears that these platforms are acting like stock exchanges and might be violating the rules of private placement by offering shares to more than 200 investors.

Some investors share Sebi´s concerns.

"Angel networks are mushrooming, and Sebi´s concerns are genuine.

There are public market processes and private placement processes.

Sebi wants to understand how these platforms are operating, and if due process is being followed, and if investor protection processes are being followed,´´ said Alok Mittal, an angel investor cumentrepreneur.

Sebi is partly concerned about how these issues are being marketed.

Typically,aprivate placement is made toadefined set of investors.

But the way these deals are sold, the process looks likeapublic issue.

The issue is offered to more than 200 investors on some platforms, even if only 50 investors eventually invest.

Many networks have hundreds of angels.

Similarly, some platforms are offering secondary deals on their platforms and have talked about creating a private exchange.

"This could have two outcomes.

If networks are in compliance, life goes on. If there are exceptions, it could lead to regulations for crowd funding, for which there has beenaclamour. This could be an exercise to understand the same," said Mittal.

Gopal Srinivasan, chairman, Indian Venture Capital Association, said Sebi wanted to know if these networks were acting as an exchange orapooling vehicle.

"It has only sought explanation; nobody is indicted," he said.

Padmaja Ruparel, cofounder, Indian Angel Network, said Sebi wanted to ensure that everyone played by the rules.

“You don´t runaventure capital fund without Sebi registration,” she said, while confirming that the regulator has written to the Network seeking clarifications, but added “it is notanotice”.

Many angel investors felt Sebi´s fears were unfounded as there were never more than 200 investors in a deal. ´´90 per cent of the process is offline.

Investors meet founders, do the due diligence, the shareholding agreement.

Angel networks in India don´t work like crowdsourcing platform AngelList where anonymous investors invest,´´ said Sanjay Mehta, an angel investor.

´´Sebi should look at angel networks as offline investment platforms and not put them in crowd funding category as they operate very differently.

We expect Sebi to ease out investing in startups than put up unnecessary impediments with compliance,´´ said Mehta.

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